Posts tagged ‘Economic growth’

At the opening of Zaozuo’s first furniture store this month in Beijing, a shopper snoozed on a couch while others clambered onto wall-mounted shelves to take selfies perched in chairs.

Welcome to furniture retailing with Chinese characteristics.Online furniture startup Zaozuo Zaohua Zworks Ltd. opened the outlet in an upscale mall after hitting resistance from customers wary of buying bulky items without so much as a feel of the fabric, let alone a bit of shuteye.

Liu Yusi, a 33-year old human-resource executive living in Beijing, said the showroom is a good idea given that buying large pieces of furniture without a test drive can be a leap of faith, although she was a little disappointed there weren’t any beds on display. “Maybe the store is too small,” Ms. Liu said. “But I think a mattress is something you really need to lay on before you decide to buy.”

Zaozuo has tried to distinguish itself from competitors by letting customers vote on the design and style of furniture items at the prototype stage before they’re mass produced, a strategy it says reduces inventory and cuts cost. This is a Chinese adaptation of business models used by the likes of U.S. website Threadless.com — which conducts online polls of crowd-sourced T-shirt designs before producing winning entries – and by crowd-funding sites that have investors vote on ventures they’re willing to fund.

The approach has its skeptics. Guangdong Weiyuhua Furniture Co. says it thinks Zaozuo’s voting is a gimmick and questions whether selling furniture online is sustainable. “It targets a few rich people in cities like Beijing or Shanghai,” said company sales manager Li Songzhi. “Traditional furniture companies like ours have real stores all over China.”

The old system is not working very well,” said Ms. Shu. “That was the starting point of our business model.”

One potential problem with the company’s voting system is possible voter fraud, says Travis Wu, China research director with consultancy Forrester Research Inc. “In China, everything is a bit tricky, and lots of people try to game the system,” Mr. Wu said. That could see designers tilt results toward their own models, for example, or allow competitors to steer Zaozuo into producing money-losing items, he said.

Another concern: with Zaozuo opening a showroom, it risks driving up costs and undercutting its advantage over traditional furniture makers. Mr. Guan says users must be registered before voting, the company watches carefully for unusual online activity and the new store is not a major investment.

Zaozuo, which attracted several thousand curious shoppers to its store launch on a recent weekend, sees itself inhabiting a competitive space between expensive designer brands and mass marketers like Sweden’s IKEA, a company that attracts its share of showroom lounge lizards. On any given weekend, entire families can be found snoozing on beds in Ikea’s massive showrooms, luxuriating in the air conditioning and enjoying the inexpensive food.

China’s fragmented furniture industry with around 5,000 large companies and combined revenue of 244.5 billion yuan [$37.3 billion] in 2015, up 16.1% increase from the previous year, is tradition-bound and due for a shakeup, say online companies. Internet furniture companies only command a tiny slice of the market but are growing rapidly. Privately held Zaozuo said sales are increasing by 40% annually although it has yet to break even. MZGF Furniture Studio Co., another online firm, said sales have been expanding by as much as 200% year on year in some months.

Zaozuo, which works with 50 Chinese factories and more than 80 European designers, has attracted $17.5 million in venture funding and hopes to eventually go public. Anna Fang, chief executive of venture capital group Zhen Fund, which has invested $1.3 million in Zaozuo, said prospects for the industry are promising but the startup may need to shorten delivery times, which range from three to 35 days. “Ikea can get furniture to you right away,” she added.At its store opening, Zaozuo said it tried to discourage shoppers from getting too comfortable on its furniture. “The customer might be comfortable, but the image is not that good for other customers who can’t feel the fabrics if someone’s sleeping on it,” said Mr. Guan. “Maybe they do it because they’re tired. Shopping can be very tiring.”

The Manila-based development lender expects the Indian economy to grow by 7.4% in the year that ends next March, keeping its earlier forecast unchanged in an update to its regional outlook.

The ADB lifted its forecast for China’s growth this calendar year slightly, to 6.6%, but it still expects India’s economic growth to broadly outpace its neighbors’ through 2017. (The comparison isn’t exact. India and other South Asian countries report economic data on a fiscal-year basis. China and others use calendar years.) In Asia, only Myanmar, which is opening up after decades of isolation but remains small by comparison, is expected to expand more quickly, at 8.4%.

The ADB said India’s growth prospects have been buoyed thanks to the enactment of “long-awaited structural reform.”

The bank lauded “strong progress” in restructuring Indian lenders’ balance sheets, which for years have been weighed down by bad loans. Large corporations are also finding ways to reduce debt, the bank said, which could also help resuscitate long-stagnant lending and investment.

Recent legislation that creates a national goods-and-services tax, the ADB said, is “a key step toward a much more integrated, productive economy.”

Other factors, the bank said, should keep Indian consumers spending.Government workers are due to receive a big boost to their pay and pensions, while abundant monsoon rains this summer will likely lift rural incomes.

There are risks, though, the ADB said.

Much of India’s recent growth has been driven by government spending. But that has slowed after a burst of public investment last year. New Delhi this financial year wants to shrink its budget deficit, but so far, it hasn’t raised as much money as expected from selling off stakes in state companies and other assets. That means expenditure may need to be reined in even further.Investment by private companies, meanwhile, has been “listless,” the ADB said.

Foreign direct investment in India has remained strong, the bank noted, and New Delhi has been raising limits on foreigners’ stakes in Indian enterprises. But the $63 billion flood of foreign investment seen last year “would be difficult to replicate,” the bank said.

Rapid price growth, too, could continue to weigh on Indian consumers and investors. Inflation in India, which the ADB forecasts at 5.4% this year, remains among the highest in Asia.The nation’s central bank is now actively mandated, for the first time in its history, to keep consumer inflation within a government-set range. “While this is a ground-breaking monetary policy reform, the target of 4% would seem somewhat ambitious,” the bank said.

What a contrast! See pair of articles – this on on China, the other on India, both from WSJ.

Recent stability in the Chinese economy masks deep-seated problems that threaten to rattle global markets in advance of a leadership change next year, according to a survey.

Ignoring these risks is shortsighted, said authors of the China Beige Book International, a quarterly survey that tracks the world’s second-largest economy.Data from the group’s third-quarter survey of 3,100 Chinese firms and 160 bankers point to some potential problems. New growth engines intended to shift the economy away from investment toward consumption-led growth are increasingly wobbly as corporate cash flow is squeezed and Beijing doubles down on traditional engines to stabilize output, the China Beige Book says.

“I’d find it earth-shatteringly surprising if we don’t have a significant problem between now and China’s leadership change” in the fall of 2017 when the 19th Party Congress convenes, said Leland Miller, China Beige Book’s president. “This is not a stable economy. It’s one that twists and turns and happens to end up at the same spot. There are real problems below the surface.”

Growth in China’s service industry, a cornerstone of its planned transition to a new and more sustainable economic model, weakened during the third quarter as financial services, private healthcare, telecommunications, media and other subsectors flagged, the group’s data showed. In retail, the apparel, luxury goods and food sectors slowed, it said, as online retailers continued to cannibalize brick-and-mortar sales.

Despite Beijing’s pledge to reduce excess Industrial capacity and pare debt, China remains heavily dependent on government spending to power traditional debt-fueled growth engines, the group said. Much of the economic momentum during the third quarter came from infrastructure, manufacturing, commodities and real estate and many of these sectors are in danger of losing momentum, it said.

While property sales remained strong in major cities, cash flow in the sector tightened and borrowing increased, a sign that investors should “think about getting off this train sooner rather than later,” the China Beige Book said.

“Deteriorating corporate finances and a rebalancing reversal seem a high price to pay for a quarter’s worth of stability,” the group added.

Economic and monetary authorities didn’t respond to requests for comment.

China roiled global markets last year when stocks plunged and Beijing intervened to prop them up. A few months later, it introduced a new currency system in which the yuan fell against the dollar, fueling concern that this would launch a destabilizing round of currency depreciations among rival trading nations. State spending and easy money policies since then have settled investor nerves.

China is expected to report third-quarter economic growth of around 6.7% next month, the level it posted in both the first and second quarters. Gauges such as industrial production and fixed-asset investment have been surprisingly robust over the past month.The trigger for another potential market jolt in the next few quarters could be the release of particularly weak Chinese service or retail data coinciding with a Federal Reserve interest rate rise or another global event, Mr. Miller said. “Right now, the markets are lulled to sleep,” he said. “People become used to the stable China narrative until they start looking more closely into the data.”

A report released Tuesday by the International Monetary Fund said China can reduce the negative impact on the global economy of its shift to slower but more sustainable growth by ending its use of targets to artificially prop up growth and by communicating its intentions clearly.

Other economists say they expect the Chinese economy to remain relative stable through the once-in-five-year leadership change, which is expected to be in October or November of 2017, as long as Beijing continues stimulating the economy enough to avoid a drop in growth. “I don’t think there’s going to be a crisis next year,” said Julian Evans-Pritchard, an economist with Capital Economics Pte. “But they often take their foot off the pedal too much, then tend to panic again and put it back on, creating a lag.”

The Bank for International Settlements warned last week that mounting leverage raises the risk of a financial crisis in China. The nation’s total debt, led by rising corporate obligations, is on target to reach 253% of gross domestic product by the end of 2016, a doubling over the past eight years, according to credit ratings agency Fitch Ratings Inc.

Third quarter China Beige Book data also pointed to areas of strength. The job market remains strong. The manufacturing outlook improved with new domestic and international factory orders picking up and deflationary pressure on industry ebbing.“It was not a disaster of a quarter,” Mr. Miller said. “But it’s a lot more negative than people think.”

China’s economy strengthened in August, with a slew of data, from factory production to retail sales, beating estimates Tuesday. The improved performance is a fresh sign that stepped-up government spending and strong property sales are helping to stabilize growth in the world’s second-largest economy.

As for the numbers themselves, as reported by the government, industrial output rose 6.3% last month from a year earlier. Investment in buildings and other fixed assets outside rural households climbed a better-than-expected 8.1% year over year in the first eight months of 2016, while retail sales grew 10.6% in August from a year ago.

Economists generally cheered the numbers, but wondered how long the better times would last. Following are excerpts from economists’ views on the latest data, edited for length and style:Better-than-expected data out of China today raise hopes that policymakers’ efforts to reverse the slide in investment growth are seeing some success. Stronger industrial activity last month appears to have been partly driven by a recovery in investment spending, especially in the state sector. The delayed impact of earlier policy easing means that a stronger second half of this year is likely. The latest evidence of a pick-up suggests that recent concerns that policy easing had failed to provide any noticeable boost to the economy were likely somewhat premature. Julian Evans-Pritchard, Capital EconomicsToday’s data suggest that the downside risk for third quarter GDP is significantly reduced. Investment in manufacturing industry increased only 3% in Jan-Aug, while investment in services picked up to 11.2%, showing economic rebalancing continues to take place. The uptick in industrial output is consistent with the rebound in the August official manufacturing PMI. However, the divergence of PMI performance between large corporates and small- and medium-size enterprises remains a concern.

Louis Lam and David Qu, ANZ ResearchWe expect investment to remain under pressure for the rest of the year because of slower real estate construction and spare capacity in key sectors. But with industrial profits recovering recently, and investment also up in August, the downward pressure should diminish. Meanwhile, export momentum should improve along with global trade, while we expect consumption to hold up. In all, while further stimulus is necessary to reach the government’s GDP growth target of at least 6.5% this year, the outlook has improved slightly after the August data. Louis Kuijs, Oxford EconomicsChina needs to nurture an initial economic stabilization with continued fiscal support. Today’s data show economic growth seems to have stabilized a little last month, but it is not on a solid footing yet. Measures such as tax cuts and increased government spending can not only help spur growth but also help restructure the economy by boosting consumption. Fiscal expenditures rose 10% in August from a year earlier, much faster than July’s 0.3% increase. Liu Xuezhi, Bank of Communication

After a summer lull, China’s economy is likely to have picked up, if only slightly, in August, according to economists.

The stirring in business activity, while lackluster, points to stabilization in the world’s second-largest economy, a survey of 15 economists by The Wall Street Journal showed. August data numbers to be released in coming days are expected to show that factory output improved marginally and new bank credit picked up, while investment and retail sales slowed, though not by much, the survey said.“We expect the upcoming August data release to show China’s economic activity finding a slightly firmer footing after July’s more-than-expected weakening,” said economists at UBS Securities Asia Ltd.

A surprising rise in a key gauge of manufacturing activity earlier this month buoyed the outlook for many economists.Industrial output, a rough proxy for economic growth, likely grew 6.2% in August from a year earlier, compared with a 6.0% increase in July, the survey showed. Fixed-asset investment outside rural households, a key gauge of construction activity, likely expanded 7.9% for the January-to-August period, slightly slower than an 8.1% increase over the first seven months.

Among the other positive signs, the consumer-price index, a main gauge of inflation, moderated, likely rising 1.6% from a year earlier last month and slightly slower than the 1.8% growth in July, the survey found. Meanwhile, the producer-price index, a gauge of factory gate prices, likely dropped 0.9% from a year earlier last month, improving from a 1.7% decline in July and continuing a march out of deflationary territory where it has been for more than four years.

The better performance should give policymakers confidence to stay the course and refrain from interest-rate cuts or other aggressive easing measures, economists said.

At the same time, the faint improvements are largely the result of better performance of large firms that benefit more from policy support, economists said, while growing piles of debt and percolating bubbles in the property market are a looming concern for policymakers.

“At this moment, the key constraint faced by China’s monetary policy is not inflation, but the property market and the financial market,” said economists at Macquarie Capital Ltd.

Chinese banks probably gave out 792.5 billion yuan ($118.69billion) in new credit last month, well above July’s 463.6 billion yuan, the survey of economists showed. The economists mainly attributed the rebound to seasonal patterns, since banks tend to pick up the pace of lending at the end of each quarter.

In July almost all the new credit went to medium- and long-term household loans, predominantly mortgage lending. Lending to corporate borrowers, however, recorded a net drain of 2.6 billion yuan, the first negative growth in 11 years.

Household mortgage loans may have continued to surge in August. Recent data show a jump in housing transactions in many cities, and housing prices continue to rise. Credit demand from the corporate sector likely remained sluggish, though may have improved mildly, economists of Standard Chartered Bank.

Trade also remained anemic. Outbound shipments likely declined 4.0% from a year earlier in August, compared with July’s drop of 4.4%, while imports likely dropped by 5.0%, improving notably from July’s 12.5% dip, the same poll showed. Improvements in imports reflect last year’s low base, likely slightly better industrial production activity, and continued easing of import price deflation, UBS economists noted.

That would bring the country’s trade surplus to $59.40 billion last month, widening from July’s $52.31 billion. A large trade surplus should lend support to the country’s hoard of foreign currencies, which is expected to have dropped only slightly last month. The nation’s total reserves likely fell by about $2 billion last month to $3.199 trillion, the survey showed.

Indian factory activity expanded at its fastest pace since mid-2015 in August, helped by surging new orders, while only modest price increases should give the central bank scope to ease policy further, a survey showed.

The data will cheer policymakers after an official report on Wednesday showed Indian annual economic growth slowed in the April-June quarter to 7.1 percent, short of expectations for 7.6 percent in a Reuters poll.

The Nikkei/Markit Manufacturing Purchasing Managers Index rose to 52.6 in August from July’s 51.8, marking its eighth month above the 50 level that separates growth from contraction.

“Manufacturing PMI data show that the positive momentum seen at the beginning of the second semester has been carried over into August, with expansion rates for new work, buying levels and production accelerating further,” said Pollyanna De Lima, economist at survey compiler Markit.

The new orders sub-index, which takes into account both domestic and external demand, was 54.8 in August – its highest since December 2014 and indicating robust demand for Indian manufactured goods.

That pushed factories to increase production and the output sub-index climbed to a 12-month peak in August.But price growth lost momentum last month, with raw material costs increasing at their weakest rate in six months and output prices barely rising at all, suggesting consumer inflation could cool in coming months.

“In light of these numbers, the Reserve Bank of India has scope to loosen monetary policy in the upcoming meeting to further support economic growth in India,” De Lima said.On Oct. 4, the RBI is due to announce its first policy decision under newly-appointed governor Urjit Patel, who economists expect to broadly follow in outgoing chief Raghuram Rajan‘s footsteps.

Economists in a Reuters poll last month predicted the RBI would cut the repo rate by 25 basis points to 6.25 percent in the final three months of the year.

They see little steam left in the RBI’s current easing cycle, in which the policy repo rate has come down by 150 basis points since January 2015, to its lowest in more than five years.Consumer inflation in India was 6.07 percent in July, well above the RBI’s March 2017 medium-term target of 5 percent.

It won’t be easy, but shifting to a productivity-led economy from one focused on investment could add trillions of dollars to the country’s growth by 2030.

After three decades of sizzling growth, China is now regarded by the World Bank as an upper-middle-income nation, and it’s on its way to being one of the world’s advanced economies. The investment-led growth model that underpinned this extraordinary progress has served China well. Yet some strains associated with that approach have become evident.In 2015, the country’s GDP growth dipped to a 25-year low, corporate debt soared, foreign reserves fell by $500 billion, and the stock market dropped by nearly 50 percent. A long tail of poorly performing companies pulls down the average, although top-performing Chinese companies often have returns comparable with those of top US companies in their industries. More than 80 percent of economic profit comes from financial services—a distorted economy. Speculation that China could be on track for a financial crisis has been on the rise.

The nation faces an important choice: whether to continue with its old model and raise the risk of a hard landing for the economy, or to shift gears. A new McKinsey Global Institute report, China’s choice: Capturing the $5 trillion productivity opportunity, finds that a new approach centered on productivity could generate 36 trillion renminbi ($5.6 trillion) of additional GDP by 2030, compared with continuing the investment-led path. Household income could rise by 33 trillion renminbi ($5.1 trillion), as the exhibit shows.

Pursuing a new economic model

China has the capacity to manage the decisive shift to a productivity-led model. Its government can pull fiscal and monetary levers, such as raising sovereign debt and securing additional financing on the basis of 123 trillion renminbi in state-owned assets. China has a vibrant private sector, earning three times the returns on assets of state-owned enterprises. There are now 116 million middle-class and affluent households (with annual disposable income of at least $21,000 per year), compared with just 2 million such households in 2000. And the country is ripe for a productivity revolution. Labor productivity is 15 to 30 percent of the average in countries that are part of the Organisation for Economic Co-operation and Development (OECD).

A new productivity-led model would enable China to create more sustainable jobs, reinforcing the rise of the consuming middle class and accelerating progress toward being a full-fledged advanced economy. Such a shift will require China to steer investment away from overbuilt industries to businesses that have the potential to raise productivity and create new jobs. Weak competitors would need to be allowed to fail rather than drag down profitability in major sectors. Consumers would have more access to services and opportunities to participate in the economy.

Making this transition is an urgent imperative. The longer China continues to accumulate debt to support near-term goals for GDP growth, the greater the risks of a hard landing. We estimate that the nonperforming-loan ratio in 2015 was already at about 7 percent, well above the reported 1.7 percent. If no visible progress is made to curb lending to poorly performing companies, and if the performance of Chinese companies overall continues to deteriorate, we estimate that the nonperforming-loan ratio could rise to 15 percent. This would trigger a substantial impairment of banks’ capital and require replenishing equity by as much as 8.2 trillion renminbi ($1.3 trillion) in 2019. In other words, every year of delay could raise the potential cost by more than 2 trillion renminbi ($310 billion). Although such an escalation would not lead to a systemic banking crisis, a liquidity crunch among corporate borrowers and waning confidence of investors and consumers during the recovery phase would have a significant negative impact on growth.

Our report identifies five major opportunities to raise productivity by 2030:

Capturing these opportunities requires sweeping change to institutions. China needs to open up more sectors to competition, enable

corporate restructuring, and further develop its capital markets. It needs to raise the skills of the labor force to fill its talent gap and to sustain labor mobility. The government will need to manage conflicts among many stakeholders, as well as shift governance and incentives that rewarded a single-minded focus on rising GDP, even as it modernizes its own processes.

Exactly how can China’s economy become more productive? Go to Tableau Public to examine how six industry archetypes contribute to the country’s growth by province.

The country could create sustainable economic conditions in five ways, such as promoting acceptable living standards, improving the urban infrastructure, and unlocking the potential of women.

Twenty-five years ago, India embarked on a journey of economic liberalization, opening its doors to globalization and market forces. We, and the rest of the world, have watched as the investment and trade regime introduced in 1991 raised economic growth, increased consumer choice, and reduced poverty significantly.

Now, as uncertainties cloud the global economic picture, the International Monetary Fund has projected that India’s GDP will grow by 7.4 percent for 2016–17, making it the world’s fastest-growing large economy. India also compares favorably with other emerging markets in growth potential. (Exhibit 1).

The country offers an attractive long-term future powered largely by a consuming class that’s expected to more than triple, to 89 million households, by 2025.Exhibit 1

Liberalization has created new opportunities. The challenge for policy makers is to manage growth so that it creates the basis for sustainable economic performance. Although much work has been done, India’s transformation into a global economic force has yet to fully benefit all its citizens. There’s a massive unmet need for basic services, such as water and sanitation, energy, and health care, for example, while red tape makes it hard to do business. The government has begun to address many of these challenges, and the pace of change could accelerate in coming years as some initiatives gain scale.

From our vantage point, India has an exciting future. In the new McKinsey Global Institute report India’s ascent: Five opportunities for growth and transformation, we look at game-changing opportunities for the country’s economy and the implications for domestic businesses, multinational companies, and the government. The five areas we focus on by no means provide a comprehensive assessment of India’s prospects, but we believe they are among the most significant trends. Foreign and Indian businesses would do well to recognize these opportunities and reflect on how to exploit them.

1. From poverty to empowerment:

Acceptable living standards for allThe trickle-down effect of economic liberalization has lifted millions of Indians from indigence in the past two decades. The official poverty rate declined from 45 percent of the population in 1994 to 22 percent in 2012, but this statistic defines only the most dismal situations. By our broader measure of minimum acceptable living standards—spanning nutrition, water, sanitation, energy, housing, education, and healthcare—we find that 56 percent of Indians lacked the basics in 2012.

The country will need to address these gaps to achieve its potential. The task is certainly within India’s capacity, but policy makers will have to promote an agenda emphasizing job creation, growth-oriented investment, farm-sector productivity, and innovative social programs that help the people who actually need them. The private sector has a substantial role to play both in creating and providing effective basic services.

2. Sustainable urbanization:

Building India’s growth enginesBy 2025, MGI estimates, India will have 69 cities with a population of more than one million each. Economic growth will center on them, and the biggest infrastructure building will take place there. The output of Indian cities will come to resemble that of cities in middle-income nations (Exhibit 2).

In 2030, for example, Mumbai’s economy, a mammoth market of $245 billion in consumption, will be bigger than Malaysia’s today. The next four cities by market size will each have annual consumption of $80 billion to $175 billion by 2030.Exhibit 2To achieve sustainable growth, these cities will have to become more livable places, offering clean air and water, reliable utilities, and extensive green spaces. India’s urban transformation represents a huge opportunity for domestic and international businesses that can provide capital, technology, and planning know-how, as well as the goods and services urban consumers demand.

3. Manufacturing for India, in India

Although India’s manufacturing sector has lagged behind China’s, there will be substantial opportunities to invest in value-creating businesses and to create jobs. India’s appeal to potential investors will be more than just its low-cost labor: manufacturers there are building competitive businesses to tap into the large and growing local market. Further reforms and public infrastructure investments could make it easier for all types of manufacturing businesses—foreign and Indian alike—to achieve scale and efficiency.

4. Riding the digital wave:

Harnessing technology for India’s growthTwelve powerful technologies will benefit India, helping to raise productivity, improving efficiency across major sectors of the economy, and radically altering the provision of services such as education and healthcare. These technologies could add $550 billion to $1 trillion a year of economic value in 2025, according to our analysis, potentially creating millions of well-paying, productive jobs (including positions for people with moderate levels of formal education) and helping millions of Indians to enjoy a decent standard of living.

Our research suggests that women now contribute only 17 percent of India’s GDP and make up just 24 percent of the workforce, compared with 40 percent globally. In the coming decade, they will represent one of the largest potential economic forces in the country. If it matched the progress toward gender parity of the region’s fastest-improving country, we estimate that it could add $700 billion to its GDP in 2025. Movement toward closing the gender gap in education and in financial and digital inclusion has begun, but there is scope for further progress.

Public-sector efforts to address the five areas are under way. The government is attempting to improve the investment climate and accelerate job creation—India’s ranking on the World Economic Forum’s Global Competitiveness Report climbed to 55 in 2015–16, from 71 a year earlier. Officials are moving to make the government more efficient, using technology that can leapfrog traditional bottlenecks of a weak infrastructure. One billion Indian citizens, for example, are now registered under Aadhaar, the world’s largest digital-identity program and a potent platform for delivering benefits directly to the poor.

Realizing India’s promise will require national, state, and local leaders to adopt new approaches to governance and the provision of services. To meet the people’s aspirations, these officials will also need new capabilities. The requirements include private sector–style procurement and supply-chain expertise, deep technical skills for planning portfolios of infrastructure investments, and strong project-management capabilities to ensure that large capital projects finish on time and on budget. Training will be needed to help staff members use digital technologies to automate and reengineer processes, manage big data and advanced analytics, and improve interactions among citizens through digitized touchpoints, online-access platforms, portals, and messaging and payment platforms. The government could acquire these capabilities by adopting quality-oriented procurement policies and taking advantage of secondments from the private sector. For businesses, India represents a sizable market but will require a granular strategy and a locally focused operating model.

No single report can capture all the changes taking place in the country, but we have tried here to identify the most significant trends. Foreign and Indian businesses should consider how their strategies will be influenced by them. Policy makers should focus on helping all stakeholders to capitalize on them. By any measure, the challenge is daunting, but success could give a historic boost to India’s economy.

Indian manufacturing activity edged up to a three-month high in June, driven by stronger demand, but firms barely raised prices, a private survey showed, leaving the door open for another rate cut by the central bank this year.

The Nikkei/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 51.7 in June from May’s 50.7, its sixth month above the 50 mark that separates growth from contraction after it fell below that level in December for the first time in more than two years.

“The domestic market continues to be the main growth driver, as the Indian economic upturn provides a steady stream of new business,” said Pollyanna De Lima, economist at Markit.

“There were also signs of an improvement in overseas markets, as new foreign orders rose. However, it looks as if lackluster global demand remains a headwind for Indian manufacturers.

“While retail inflation hit a near two-year high in May, the survey’s output prices sub-index fell to a three-month low of 50.1 in June versus 50.5 the previous month, as input costs rose at a weaker pace.

There was also broadly no change to manufacturing employment in India during June, the survey showed.

According to a Reuters poll, RBI GovernorRaghuram Rajan could deliver another rate cut before his term ends in September. After cutting rates in April, he has left the key interest rate unchanged at a five-year low of 6.50 percent.

However, at the June policy meeting he signalled another rate cut later in the year if monsoon rains were sufficient enough to dampen upward pressure on food prices.

Rains are expected to be above average this year which could keep prices in control and give the government room to focus on key economic reforms in tandem with low interest rates.

It won’t be easy, but shifting to a productivity-led economy from one focused on investment could add trillions of dollars to the country’s growth by 2030.

After three decades of sizzling growth, China is now regarded by the World Bank as an upper-middle-income nation, and it’s on its way to being one of the world’s advanced economies. The investment-led growth model that underpinned this extraordinary progress has served China well. Yet some strains associated with that approach have become evident.

In 2015, the country’s GDP growth dipped to a 25-year low, corporate debt soared, foreign reserves fell by $500 billion, and the stock market dropped by nearly 50 percent. A long tail of poorly performing companies pulls down the average, although top-performing Chinese companies often have returns comparable with those of top US companies in their industries. More than 80 percent of economic profit comes from financial services—a distorted economy. Speculation that China could be on track for a financial crisis has been on the rise.

The nation faces an important choice: whether to continue with its old model and raise the risk of a hard landing for the economy, or to shift gears. A new McKinsey Global Institute report, China’s choice: Capturing the $5 trillion productivity opportunity, finds that a new approach centered on productivity could generate 36 trillion renminbi ($5.6 trillion) of additional GDP by 2030, compared with continuing the investment-led path. Household income could rise by 33 trillion renminbi ($5.1 trillion).

China has the capacity to manage the decisive shift to a productivity-led model. Its government can pull fiscal and monetary levers, such as raising sovereign debt and securing additional financing on the basis of 123 trillion renminbi in state-owned assets. China has a vibrant private sector, earning three times the returns on assets of state-owned enterprises. There are now 116 million middle-class and affluent households (with annual disposable income of at least $21,000 per year), compared with just 2 million such households in 2000. And the country is ripe for a productivity revolution. Labor productivity is 15 to 30 percent of the average in countries that are part of the Organisation for Economic Co-operation and Development (OECD).

A new productivity-led model would enable China to create more sustainable jobs, reinforcing the rise of the consuming middle class and accelerating progress toward being a full-fledged advanced economy. Such a shift will require China to steer investment away from overbuilt industries to businesses that have the potential to raise productivity and create new jobs. Weak competitors would need to be allowed to fail rather than drag down profitability in major sectors. Consumers would have more access to services and opportunities to participate in the economy.

Making this transition is an urgent imperative. The longer China continues to accumulate debt to support near-term goals for GDP growth, the greater the risks of a hard landing. We estimate that the nonperforming-loan ratio in 2015 was already at about 7 percent, well above the reported 1.7 percent. If no visible progress is made to curb lending to poorly performing companies, and if the performance of Chinese companies overall continues to deteriorate, we estimate that the nonperforming-loan ratio could rise to 15 percent. This would trigger a substantial impairment of banks’ capital and require replenishing equity by as much as 8.2 trillion renminbi ($1.3 trillion) in 2019. In other words, every year of delay could raise the potential cost by more than 2 trillion renminbi ($310 billion). Although such an escalation would not lead to a systemic banking crisis, a liquidity crunch among corporate borrowers and waning confidence of investors and consumers during the recovery phase would have a significant negative impact on growth.

Our report identifies five major opportunities to raise productivity by 2030:

Capturing these opportunities requires sweeping change to institutions. China needs to open up more sectors to competition, enable corporate restructuring, and further develop its capital markets. It needs to raise the skills of the labor force to fill its talent gap and to sustain labor mobility. The government will need to manage conflicts among many stakeholders, as well as shift governance and incentives that rewarded a single-minded focus on rising GDP, even as it modernizes its own processes.